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Are UK ‘Dog funds' facing extinction?

Bestinvest, the online investment service, is set to publish the latest edition of its controversial bi-annual Spot the Dog report this weekend. The report will ‘name and shame’ 34 consistently poor performing equity funds open to retail investors which collectively represent £7.6 billion of investor’s savings. Each fund has underperformed its market benchmark for the last three consecutive 12-month periods on the trot and by more than 5% over the entire three-year period.

The report is loathed by fund management companies who have already been battered by recent criticism in a study by the UK’s Financial Conduct Authority over lack of competition on costs. While the already embattled industry is unlikely to bark for joy with the publication of the latest report, it does however offer a ray of relatively positive news as a sharp fall in the number of outright howlers is revealed.

Significantly the latest report found only one solitary UK equity fund – the St. James’s Place Equity Income fund – which had met its criteria for inclusion. This was down from six UK equity funds at the start of 2017 and is the lowest level in the two decades that Bestinvest has published its report. Another area where dog funds were found to be a dying breed is Japan, with a single fund highlighted. No Global Emerging Market funds hit Bestinvest’s filters in this edition.

Even in the arena of US equities, a notoriously difficult market for active fund managers to add value and regularly one of the largest kennels, the number of funds that met the criteria for inclusion tumbled from nine at the start of 2017 to six. The biggest pack of dog funds continues to be found across the global equity fund universe, with 17 funds included (up from 16 in the last issue), but Bestinvest points out that 8 of these have income generation as part of their brief which in most cases means they will have been underweight the soaring US equity market as it is relatively low-yielding.

UK-listed Aberdeen Asset Management, which is currently in the process of a mega-merger with Standard Life, headed the hall of shame with over £2 billion of assets, representing 27% of the total, across five of its funds. The primary culprit here is the firm’s £1.3 billion Asia Pacific Equity fund which has lagged the MSCI AC Asia Pacific index by -7% over the three years to end of June 2017.

Snapping at Aberdeen’s ankles in second place with £1.7 billion of assets in three funds is advice group St. James’s Place. SJP appoints external fund managers to run its fund and its main offender in this edition is its Great Dane sized £1 billion Equity Income fund, run by boutique RWC, which carries a hefty 1.61% pa ongoing costs.

Jason Hollands, Managing Director at Bestinvest, said: “Pleasingly there are just two funds that are ‘big beasts’, both have over a billion of assets, with most of the funds included in this report being pretty small in size. The overall drop in funds hitting our exacting criteria is also encouraging but it remains to be seen whether this is a technical blip or a sign of more meaningful trend coming through.”

”The shift to lower cost, commission-free share classes a few years back is likely to have helped reduce the number of underperformers, as has fund consolidation activity. But another technical factor that is likely to be at play here was the rally in the second half of 2016 in stocks that were seen as sensitive to reflation. This bounce, which has since faded, will have lifted – at least temporarily - some of the more value orientated managers out of the doldrums after a prolonged period where quality growth companies have led the way. The jury is therefore out on whether the industry has really cleaned up its act.

“Importantly, these filters are only designed to highlight the ‘worst of the worst’ and there are a great many more pedestrian funds out there including closet-trackers which largely follow the index but charge excessive fees for doing so. Their performance may not be amongst the very worst, but such funds represent poor value for money. A real challenge for investors is that equity markets have delivered such strong returns in recent years, boosting the value of funds which have lagged the market, this has masked the lack of value added by some managers and will have left many investors unaware that they could be doing considerably better elsewhere. It is therefore vital to periodically thoroughly review your investments to make sure you are in funds that can truly justify the fees charged.”

Readers offer: Members of the public can get a free copy of Spot the Dog by downloading it from www.bestinvest.co.uk/dogs or calling 020 7189 9999

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Number of funds in Spot the Dog

Important information:

Please note that Spot the dog is intended purely as a representation of statistical data.

The value of investments, and any income derived from them, can go down as well as up and you may get back less than you originally invested. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change. This press release does not constitute personal advice. If you are unsure about the suitability of any investment, you should seek professional advice. Past performance is not a guide to future performance.

Different funds carry varying levels of risk depending on the geographical region and industry sector(s) in which they invest. You should make yourself aware of these specific risks prior to investing.

About Tilney

Tilney is a leading investment and financial planning firm that builds on a heritage of more than 150 years. The Tilney Group operates under the Tilney brand for Investment Management and Financial Planning and Bestinvest for execution-only investing. We look after more than £22 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.

We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.

We have won numerous awards including Best Fund Platform and Best SIPP Provider at the 2017 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.

Headquartered in Mayfair, London, Tilney Group employs over 1,000 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.

Gillian Kyle

Katy Moore

The value of your investment can go down as well as up, and you can get back less than you originally invested.

Past performance or any yields quoted should not be considered reliable indicators of future returns. Restricted advice can be provided as part of other services offered by Tilney Group, upon request and on a fee basis. Before investing in funds please check the specific risk factors on the key features document or refer to our risk warning notice as some funds can be high risk or complex; they may also have risks relating to the geographical area, industry sector and/or underlying assets in which they invest. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change.

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